I find it very amusing that we are being bombarded with so many absurd election year “talking points” and none of them concern the risk of a 2012 economic recession. The entire world seems in denial about a global problem which is about to hit everyone over the head. I’m reminded of the odd brainstorming session in September of 2008, when Presidential candidates Obama and McCain were seated at the same table with a number of econ-honchos, all of whom were scratching their heads in confusion about the financial crisis. Something similar is about to happen again. You might expect our leaders to be smart enough to avoid being blindsided by an adverse economic situation – again – but this is not a perfect world. It’s not even a mediocre world.

After two rounds of quantitative easing, the Kool-Aid drinkers are sipping away, in anticipation of the “2012 bull market”. Even the usually-bearish Doug Kass recently enumerated ten reasons why he expects the stock market to rally “in the near term”. I was more impressed by the reaction posted by a commenter – identified as “Skateman” at the Pragmatic Capitalism blog. Kass’ reason #4 is particularly questionable:

Mispaced preoccupation with Europe: The European situation has improved. . . .

The Europe situation has not improved. There is no escape from ultimate disaster here no matter how the deck chairs are rearranged. Market’s just whistling past the graveyard.

Of particular importance was this recent posting by Mike Shedlock (a/k/a Mish), wherein he emphasized that “without a doubt Europe is already in recession.” After presenting his readers with the most recent data supporting his claim, Mish concluded with these thoughts:

Telling banks to lend in the midst of a deepening recession with numerous austerity measures yet to kick in is simply absurd. If banks did increase loans, it would add to bank losses. The smart thing for banks to do is exactly what they are doing, parking cash at the ECB.

Austerity measures in Italy, Spain, Portugal, Greece, and France combined with escalating trade wars ensures the recession will be long and nasty.

* * *

Don’t expect the US to be immune from a Eurozone recession and a Chinese slowdown. Unlike 2011, it will not happen again.

Back on October 8, Jeff Sommer wrote an article for The New York Times, discussing the Economic Cycle Research Institute’s forecast of another recession:

“If the United States isn’t already in a recession now it’s about to enter one,” says Lakshman Achuthan, the institute’s chief operations officer. It’s just a forecast. But if it’s borne out, the timing will be brutal, and not just for portfolio managers and incumbent politicians. Millions of people who lost their jobs in the 2008-9 recession are still out of work. And the unemployment rate in the United States remained at 9.1 percent in September. More pain is coming, says Mr. Achuthan. He thinks the unemployment rate will certainly go higher. “I wouldn’t be surprised if it goes back up into double digits,” he says.

Mr. Achuthan’s outlook was echoed by economist John Hussman of the Hussman Funds, who pointed out in his latest Weekly Market Comment that investors have been too easily influenced by recent positive economic data such as payroll reports and Purchasing Managers Indices:

I can understand this view in the sense that the data points are correct – economic data has come in above expectations for several weeks, the Chinese, European and U.S. PMI’s have all ticked higher in the latest reports, new unemployment claims have declined, and December payrolls grew by 200,000.

Unfortunately, in all of these cases, the inference being drawn from these data points is not supported by the data set of economic evidence that is presently available, which is instead historically associated with a much more difficult outcome. Specifically, the data set continues to imply a nearly immediate global economic downturn. Lakshman Achuthan of the Economic Cycle Research Institute (ECRI) has noted if the U.S. gets through the second quarter of this year without falling into recession, “then, we’re wrong.” Frankly, I’ll be surprised if the U.S. gets through the first quarter without a downturn.

At the annual strategy seminar held by Société Générale, their head of strategy – Albert Edwards – attracted quite a bit of attention with his grim prognostications. The Economist summarized his remarks this way:

The surprise message for investors is that he feels the US is on the brink of another recession, despite the recent signs of optimism in the data (the non-farm payrolls, for example). The recent temporary boost to consumption is down to a fall in the household savings ratio, which he thinks is not sustainable.

Larry Elliott of The Guardian focused on what Albert Edwards had to say about China and he provided more detail concerning Edwards’ remarks about the United States:

“There is a likelihood of a China hard landing this year. It is hard to think 2013 and onwards will be any worse than this year if China hard-lands.”

* * *

He added that despite the recent run of more upbeat economic news from the United States, the risk of another recession in the world’s biggest economy was “very high”. Growth had slowed to an annual rate of 1.5% in the second and third quarters of 2011, below the “stall speed” that historically led to recession. It was unlikely that the economy would muddle through, Edwards said.

So there you have it. The handwriting is on the wall. Ignore it at your peril.

Although President Obama has been criticized for many of his appointments, the selection of retired Admiral Dennis Blair as Director of National Intelligence appears to have been a wise choice. Blair graduated from the United States Naval Academy in 1968. He attended Oxford University as a Rhodes Scholar contemporaneously with Bill Clinton. (However, I doubt that Blair was standing next to Bill when the former President “didn’t inhale”.) Blair retired from the Navy in 2002.

On Thursday, February 12, Blair appeared before the Senate Intelligence Committee and surprised his audience with his new threat assessment. As Tom Gjelten reported for National Public Radio:

National Intelligence Director Dennis Blair’s dramatic report last week — that the economic crisis is now the United States’ top “near-term security concern” — caught some members of Congress by surprise. But it makes sense.

The global economic downturn could easily change the world. Previously stable countries could become unstable. The geopolitical lineup could shift sharply, some countries becoming more powerful while others get weaker. Allies could turn into adversaries.

Blair’s 49-page statement opened with a detailed description of the economic crisis. It was a marked departure from threat briefings of years past, which focused first on traditional threats and battlefields like Afghanistan, Iraq and Pakistan.

“The primary near-term security concern of the United States is the global economic crisis and its geopolitical implications,” he said in a written statement for the committee.

Blair cited the inability of other nations to meet their humanitarian obligations and hostility toward the United States for causing this crisis as potential causes for unrest, as this AFP report disclosed:

“Statistical modeling shows that economic crises increase the risk of regime-threatening instability if they persist over a one to two year period,” Blair said.

“Besides increased economic nationalism, the most likely political fallout for US interests will involve allies and friends not being able to fully meet their defense and humanitarian obligations.”

* * *

“It already has increased questioning of US stewardship of the global economy and the international financial structure,” Blair said, with trading partners already upset over a “Buy American” provision in a US stimulus bill.

Rosalie Westenskow of UPI noted Blair’s concern that the impact of climate change, coinciding with the economic crisis, could provide a troublesome combination to facilitate government instability:

As temperatures rise, scientists predict natural disasters like floods and drought will also increase and government instability worldwide is likely to follow, he said.

On February 17, during an interview in Tokyo with Martha Raddatz of ABC News, Secretary of State Hillary Clinton ratified Blair’s concern about the security threat posed by the global economic crisis:

“Yes, we have to look at this as part of our threat matrix,” the secretary of state said. “I know some people have criticized him and said, ‘what does the economy have to do with terrorism.’ That’s a very short-sighted view. I think what director Blair was saying is that we get fixated sometimes on the headlines of dangers, and that is not in any way to underestimate the continuing threat from terrorism, the instability in the Middle East and Afghanistan and Pakistan and elsewhere.”

“But this economic crisis, left unresolved, will create massive unemployment,” she said. “It will upend governments, it will unfortunately breed instability, and I appreciated his putting that into the context of the threat matrix.”

It’s nice to know that we have an intelligence director who is not wedded to the Bush administration’s fixation on September 11 -style attacks. As this February 16 editorial from the San Francisco Chronicle pointed out:

The new threat isn’t as easy to identify – or vilify – as al Queda, but that doesn’t mean it’s any less serious.

* * *

No one knows what form the next wave of instability will take. The United States must start making preparations now – by shoring up our own flailing economy and supporting our allies as much as we possibly can. Blair’s warning shows how dangerous it will be for Washington to continue battling along the same tired ideological lines that it has for the last several weeks. This economic crisis could be putting more than our wallets at risk.

Of course, we don’t really need another reason to stay awake at night and worry. Fortunately, we now have someone in a crucial position, capable of identifying and focusing on new threats. Thanks for the “heads up” Admiral Blair!

About TheCenterLane.com

TheCenterLane.com offers opinion, news and commentary on politics, the economy, finance and other random events that either find their way into the news or are ignored by the news reporting business. As the name suggests, our focus will be on what seems to be happening in The Center Lane of American politics and what the view from the Center reveals about the events in the left and right lanes. Your Host, John T. Burke, Jr., earned his Bachelor of Arts degree from Boston College with a double major in Speech Communications and Philosophy. He earned his law degree (Juris Doctor) from the Illinois Institute of Technology / Chicago-Kent College of Law.